Making a profit: Don’t rely solely on high beef prices

Fixed costs must come higher up the beef producer’s agenda, say consultants. Cattle prices are firming and supplies will be tighter this year, but producers cannot rely on better prices to get into profit.

It is difficult to generalise about how producers can improve their position, but if they are not up there in the top third, they should be looking at all aspects of their business and asking themselves why not, says Stuart Ashworth of QMS.

A lot of top third performance is down to better technical performance and a more organised approach in general, such as careful selection of bulls using EBVs and planned vet spending on prevention rather than fire brigade treatment costs, says Mr Ashworth.

Top performers tend to have the same approach in their attention to detail on fixed costs and spread these across a higher number of cattle sold at higher weights and produced with better calving ratios.

This is backed up by SAC adviser Gavin Hill, whose advice is currently focusing on maximising numbers reared and identifying the right markets alongside scrutiny of costs and structures.

“It is getting harder and harder to say to people that this or that is the answer. Each farm is different not only in what it can achieve, but how it is set up. Major differences exist when looking at fixed costs in relation to whether the farm is fully owned with all family labour than when it is rented with paid employees.”

First, producers need to know where they are now in comparison with others and what they want out of the job, then they can look at how to improve.

By comparing with a peer group, the big differences in income and costs can be identified and explored – it does not mean you are necessarily doing anything wrong, because each system has its own challenges to overcome, adds Mr Ashworth.

“What it does do is challenge the producer to justify to himself (and his adviser) why he is doing something how he is, but also raises the question that there may be more efficient ways of doing things as technology and science bring new products, ideas and methods.”

Often the solution is simpler than producers imagine, such as simplifying the system or paying more attention to silage analysis, so feed can be both least cost and balanced and effective, says Mr Hill.

“Producers are doing their best to maximise output, but there are also some big structural issues to be addressed,” he says.

Many herds have already reduced in size by disposing of pre-96 cows, or are planning to do so, and are not bringing in replacements. “If you have reduced your herd by, say, 30 cows then have you actually put the equivalent amount of fixed costs down the road? Watch the scale of costs,” warns Mr Hill.

“Extreme care must be taken to avoid people looking at their costs and quickly jumping ship to a totally different system which can involve changing breeds which looks good on paper, or may be attractive due to higher end prices being offered by certain processors, linked to breed. You have to have the correct quality product to get the premium and it does not come overnight.”

Nick Allen of EBLEX agrees. “If you are making a big change to a suckler system, you are looking at a change for 10 years.”

The first challenge for fixed costs is allocating them properly, difficult when there are many enterprises sharing staff and machinery. Look at your systems, ask yourself why things are done the way they are, often there might be a simpler way others can see but you cannot, he says.

“It is all too easy to make a decision to cut or increase stock numbers, but you must look at what effect this has overall,” says Mr Allen. “There will be labour, machinery and other fixed cost implications for such decisions and they must be followed through. It’s no good cutting stock numbers, for example, and not restructuring staff, because your costs will just rise.”

Poorer performers in both EBLEX and QMS figures for lowland sucklers have higher paid labour costs per cow than the top third.

In England it is significantly higher, reflected partly by lower third herds being an average of 69 cows and top third 96 cows. Because of the higher selling weights and better prices achieved by the top performers, this difference is magnified when it is expressed as a cost a kilogram sold.

Reviewing work flows can result in lower labour costs, says Sandra Callwood of Promar, using the example where the purchase of a welder to make cost effective alterations to gates and pens made cattle handling easier and less time consuming.

Sometimes changes are prompted by an event such as a retirement, but don’t wait for a change to be forced, says Mr Allen – relate the level of labour to the stock. This may sound obvious, but work routines and processes can contribute to high labour costs and too many farms continue with what is there rather than what the job needs.

This might mean difficult decisions on getting staff to work in different ways, perhaps on other enterprises. “At the same time you have to be careful not to demotivate staff.” There is a lot of scope to share labour and machinery, particularly when it comes to silage making, he says.

In England, bottom third lowland suckler producers spend almost three times as much as top third on power and machinery.

Common reasons behind higher power and machinery costs for poorer performers include high repair bills and the tendency to use contractors, but also to hang onto their own machinery. Taking the plunge and getting rid of it not only brings in some cash, but takes it off insurance costs and reduces repair bills, says Mr Allen.

The general heading of administration swallows up a staggering £20 to £54 a cow in EBLEX and QMS beef costings, although it is not always the poorer performers who have the higher costs in this category. Bottom third herds tend to be less well organised, so professional costs such as accountancy may be higher than necessary if books are not presented in the most efficient way. Other costs buried in this category need examination.

Property charges also tend to be higher in bottom third herds, so examine what is being spent and why – is it all necessary? Look for cheaper ways of using and obtaining water and electricity (however, some producers may have these down as a variable cost). Sundries should come under the same scrutiny – is there a habit of dashing off at the last minute for supplies and what does this cost in labour and fuel?

Across all systems in Scotland and England, finance charges are higher in bottom third herds, symptomatic not only of higher borrowing, but probably also at higher interest rates and possibly with less time spent on administration and attention to detail in arrangements.

Case studies: Rochester, Northumberland; Green Hammerton, Yorkshire

CASE STUDY Malcolm Corbett, Rochester, Northumberland

There’s no halfway house with suckler cows, you either hang in there or get out and restructure.

These are the feelings of hill producer Malcolm Corbett who used to run upwards of 60 suckler cows at Dykehead Farm, Rochester, Hexham. He cut back to between 35 and 40 head as the single farm payment came in, believing the market would recognise the loss of support in better prices.

The result of cutting cow numbers was that fixed costs a cow rocketed and of course we didn’t get the market price increase we so badly needed, so we were caught in no man’s land. Ironically, now that prices are improving, weÍve got the fewest number of calves to sell ever, he says.

Because we are a smaller unit, our fixed costs are relatively high even though we don’t invest in new machinery. Many more cows could be run with current machinery levels, but lower cow numbers need the same amount of kit, he says.

If his son David had not been coming into farming, Mr Corbett says he would probably not have kept the cows. We have hung on more in hope than expectation – you can’t farm these farms without stock and they need both cattle and sheep.

Keeping the herd closed is an important part of health policy, so the opportunity to get numbers back up quickly was limited but there are 12 bulled heifers due to come in this year and the expansion back to original numbers will continue after that.

With 40 cows and 600 ewes, the farm is a one-man unit, says Mr Corbett. His NFU and EBLEX commitments mean that he spends a good deal of time away from the farm, while David also runs a sheep contracting business.

Keeping things simple is the first rule on this 121ha (300 acre) unit which Mr Powley farms with his father, Tom. Less mechanisation generally means less cost, he says, and contractors are a key part of fixed cost control.

We look at what every job would cost us to do ourselves in terms of machinery investment and depreciation and what doing it by contractor will cost.

Almost all the time, the contractor is the cheapest option and this allows us to expand and contract faster and without the knock on effect to fixed costs which it would have if we were running all our own machinery. They are a cheap way of getting labour onto the farm.

Be aware how changes in your system impact on fixed costs. A good example is the switch to TMR feeding from self feed.

But it’s not just a question of reducing fixed costs. It depends on your system, how much time you have and how you balance fixed costs with that. For example, we have just bought a new tractor and by most measures, the business can’t stand that level of depreciation, but we’re expanding and one of our most limiting factors is time.

Another important aspect of his approach to fixed costs is to question everything and to invest time to shop around. This saved him £1000 on insurance last year when he put his business out to tender on a like for like basis.

Whether it is the cost of administration, electricity, diesel or feed, there might be a cheaper way of getting it, so it’s worth putting in the time, he says.

Breeding is based on a South Devon cross Limousin red cow which is then put to a Belgian Blue bull for finished cattle production. All progeny from these cows are finished.

As well as increasing the size of the herd, a boxed beef scheme for heifer beef has recently been developed, which is time consuming. The next hurdle for the business is to find more land on which to continue the expansion.

When it comes to fixed costs, question everything and invest time to shop around, says Mike Powley.